Medical practices that once eagerly welcomed private equity are finding, thanks to COVID, that grass isn’t always greener

There was a minor detail glossed over in the eagerness of medical practices to be acquired by private equity groups, said local health care attorney Daniel Frier.

It wasn’t exactly in the fine print, but it may as well have been: When health care organizations are bleeding money, they’re just another ailing investment.

Private equity firms have been acquiring health care organizations around the country at an increasing rate over the past decade, with the value of these deals reaching a $78.9 billion crescendo last year, according to a report by Bain & Co.

Frier, co-founder of Frier Levitt LLC, and chairman of the Pine Brook-based firm’s Healthcare Department, said that, too often, doctors entered those relationships with unrealistic expectations of what the fresh financing would entail.

For the for-profit private equity firms, it was a purely financial transaction, Frier said. The leaders of specialty practices such as dermatology clinics envisioned that a commitment to the health of local communities was part of the sales pitch.

“Individual private-equity owners might be very charitable in their own right, but their fiduciary duty isn’t that,” Frier said. “Doctors don’t understand that — they’re not from that industry. This pandemic has cleared away all the nonsense.”

As elective surgeries and everything else were put on hold to combat COVID-19, Frier said, earnings for those private practices fell by 80% or more. And, when the going got bad, these organizations became struggling investments for the private equity funds that acquired them — meaning it was time to salvage profits and cut losses.

What followed was news of private equity groups threatening to shutter hospitals in the midst of the outbreak, which a nonprofit organization stepped in to prevent at Pennsylvania’s Easton Hospital, for instance. Then came threats to slash benefits of doctors busy treating those infected with COVID-19, which private equity-backed Alteon Health announced and then retracted for clinicians across New Jersey and other states.

“What you’re seeing is a lot of activity on the part of private equity firms to make sure that investors are hurting as little as possible, even if doctors are hurt,” Frier said. “I think the true colors of private equity are showing.”

Frier clarified that nothing about the private equity firms’ response to the pandemic should have come a surprise — even if, for some, it did.

Medical practices, even when they’re for-profit in their charter, have to operate with the expectation that the good of patients comes above all else, especially during a health crisis. It’s no secret that private equity funds have duties to their shareholders, Frier said.

The pandemic and the resulting precariousness for small medical practices has many close to collapse. Because of that, distressed organizations see getting underneath the umbrella of a private equity group as their only option.

“You see these smaller practices that have been significantly hurt, thinking if they were with a private equity group, they’d be better off,” Frier said. “Actually, that’s just a fallacy.”

In Frier’s view, what’s helping small organizations the most right now is Coronavirus Aid, Relief, and Economic Security Act funds, such as the Provider Relief Funds through the U.S. Department of Health and Human Services, as well as the Paycheck Protection Program through the U.S. Small Business Administration.

But practices affiliated with a larger organization might be too far above the employee size limitations for them to access the SBA’s relief funds, which are meant to help small and midsize organizations with payroll and other expenses during the pandemic.

“We had one client who was otherwise eligible for millions of dollars that had to return the money because of that,” Frier said. “It’s not as if the (private equity) firms are giving money to these groups to survive, or even lending the money, because they don’t have it themselves.”

For a number of reasons, Frier often hears that doctors are fed up with the private equity arrangements they’ve gotten into — and they want out.

That’s not easy to do, however.

The upshot in New Jersey is that the state doesn’t allow for-profit investors to buy medical practices. Obviously, they have anyways. These partnerships have involved some careful deal structuring: In short, investment firms buy nonclinical assets in a doctor’s office and provide oversight of some management tasks as a contractual relationship.

Physician groups that want to fight their way out of these relationships are using the argument that the private equity entities still have influence over the practice of medicine as a bludgeon, Frier said.

Frier expects more of that might be on the horizon. Instead of the trend being the increasing number of transactions between private equity companies and medical practices, he anticipates the bigger story will be the number of breakups in the near future.

“There’s a lot of things occurring in this space right now that will be interesting to watch unfold,” Frier said.